What is an Endowment Fund?

Definition: An endowment fund is a financial asset, typically held by a non-profit organization, which contains the capital investments and related earnings leveraged by the non-profit organization to fund the overall mission.

What Does Endowment Fund Mean?

What is the definition of endowment fund? While endowment funds are typically structured by strict contractual obligations and rules to be followed by the non-profit organization, the primary purpose of the fund is to ensure the long-term financial health of the non-profit organization and its beneficiaries.

Typically speaking, endowments are most notably associated with organizations such as hospitals, universities, churches, and scholarship funds. While specific rules and obligations apply, the most common trait of a fund is the organizations inability to leverage the principal balance for operations, rather, only income generated by the capital investments is available to the organization for use in operations. These rules help to ensure the long-term growth of the financial asset, which in turn helps to expand on the achievement of the non-profit organization’s overall mission.

Let’s take a look at a basic example of how endowment funds work!

Example

Some of the largest endowment funds in the world are held by universities, who leverage the funds to offset certain portions of their operating expenses. Let’s say for example, a university has a lot of generous and wealthy alumni who like to donate money to the university’s endowment each year. The financial donations accumulate in the fund as the principal balance, and certified fund managers ensure the principal balance of all donations are invested into a variety of different investment options that are typically restricted by the investment policy of the endowment.

In our example, let’s assume the fund principal balance is $50,000,000 and the policy of the fund states that the university cannot leverage the principal balance to fund operations. During the year, the principal balance of the fund was invested based on the fund manager’s investment strategy, and the investments generated interest and dividend earnings of $2,500,000. So, how much of the endowment can the university use? The answer is $2,500,000. The university can utilize the investment earnings to pay for things such as expanding academic programs or building new school facilities.

Summary Definition

Define Endowment Funds: Endowment fund means is an investment made by or on the behalf of a foundation that uses the earnings from the investment to fund its operations.